Foreign Tax Credit Not Applied
Delay in Amendment of Local Tax Special Cases Restriction Act and Others
[Asia Economy Reporter Dongwoo Lee] There have been calls to alleviate the burden of double taxation on corporate local income tax (local tax) for domestic companies operating overseas. While overseas companies can apply foreign tax credit for corporate tax (national tax) paid locally, local taxes do not receive such credit.
On the 5th, the Korea Economic Research Institute (KERI) stated in its report titled "Review of Double Taxation Issues on Corporate Local Income Tax for Overseas Companies" that due to legal deficiencies in the foreign tax credit provisions under local tax law, international double taxation prevention mechanisms are not functioning properly.
The report argued that since 2014, when local tax became independent from the previous system of uniformly charging 10% of corporate tax, the application of foreign tax credit has become impossible. Unlike individuals, corporations are excluded from tax credit application due to reasons such as compensating for revenue losses of local governments, according to KERI.
Companies have requested reductions by excluding foreign paid taxes from the tax base when calculating local taxes, but local governments, as tax authorities, have rejected these claims. In 2018, the Supreme Court ruled that the tax authorities’ disposition was incorrect and that foreign paid corporate taxes cannot be included as income for local tax purposes. The Supreme Court cited the "ability-to-pay principle," which requires fair taxation according to taxpayers’ capacity, as the basis for its decision.
However, the report emphasized that even after the Supreme Court ruling, the Ministry of the Interior and Safety ignored the principle of preventing double taxation by revising laws differently from the ruling under the logic of balanced regional development. The Ministry explained that it plans to promote institutional improvements related to the double taxation issue of corporate local income tax in the regular National Assembly session in the second half of this year.
Concerns have also been raised that if the double taxation issue of corporate local income tax is not resolved, overseas companies may reduce domestic dividend income. The burden of double taxation could lead to income generated overseas being retained in local subsidiaries.
Dongwon Lim, a senior researcher at KERI, said, “If foreign tax credit is not applied to domestic dividend income of overseas companies, the issue of local retention of overseas income could worsen,” adding, “To prevent double taxation between countries and maintain fairness with individual local income tax, the corporate local income tax law must be amended.”
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